McKesson is a leading healthcare company for wholesale medical supplies and equipment, pharmaceutical distribution, and healthcare technology solutions, that reported revenues of over $200 billion in 2018. Echo is a free, easy-to-use service that delivers medicines, typically repeat prescriptions, to a patient’s door. Echo’s 2018 revenues – in case you didn’t know – were a little less than $200 billion!

So whilst McKesson is a healthcare giant devoting huge resources to pharmaceutical distribution, supplies and healthcare technology solutions, they still opted to buy Echo instead of developing their own Echo-like solution. Why?

I personally think it was a very smart decision. McKesson now has the opportunity to bring Roger, Stephen and the rest of the Echo team into their ecosystem: if they allow Echo to continue to be obsessed about building elegant, user-focused tech and removing the barriers to prescription adherence, they will make a healthy return on their investment.

An exit like this is great for investors but it is not a new model. Incumbents have been buying innovative technology companies for many years. However, now is the time for government-facing organisations to start looking over their shoulders and turning to tech for growth. We will come to expect more and more of these acquisitions in GovTech. For that reason, it is time for investors to wake up to the massive potential of GovTech. To recap why PUBLIC is particularly obsessed with the GovTech opportunity:

BUY vs. BUILD

This battle – “Buy vs. Build” – has been playing out amongst corporates and government for centuries. With the advent of new technologies (e.g. cloud computing, machine-learning and APIs), smart, obsessed engineers and entrepreneurs can benefit from very cheap infrastructure to develop step change solutions that can perform at a scale and cost-effectiveness never-before available to the markets in which they look to operate. The caveat is that you need to find this smart, obsessed talent and more often than not it is not sitting inside a large corporation or government entity.

CORPORATE ACQUISITIONS

Corporates, led by the large tech companies (and particularly the Chinese tech companies) have been quick to recognise this, fuelling spectacular returns for early stage technology companies (e.g. Facebook’s acquisition of WhatsApp). It’s extraordinary to think that some of these acquisitions are even highly cannibalistic, such is the pace of change that threatens those corporates. Think of FinTech, think of eCommerce, think of the restaurant, taxi and travel industries: incumbents across these industries have been replaced or forced to acquire new entrants building on better, cheaper technologies and delivering consumer-obsessed products.

GOVERNMENT TECHNOLOGY

As briefly outlined above, product-focused entrants have transformed every major industry – the public sector being almost a sole exception. But this is changing.

Government and perhaps government suppliers in particular, represent one of the last frontiers for major technological disruption as we know it. Looking at the public sector, we see three key hallmarks of an industry ripe for disruption (excuse the anecdotal examples):

An over-reliance on legacy technologies: 70% of the US government’s $82bn IT budget is spent on maintaining legacy system

A lack of investment in technology: From 2010 to 2015, government IT expenditure was static vs. 25% growth in the private sector

A small number of incumbents dominate: The top ten UK Ministry of Defence suppliers account for 40% of total vendor spend

Governments have traditionally been slow to adapt to new technology and market entrants. Low risk appetite combined with a frequently non-technology fluent buying and policy-making layer have led to public sectors being behind the curve. Added to this, some departments are faced with low managerial bandwidth and financial restraint.

Change is coming, however. As citizens’ expectations rise and public sector challenges become steeper still – mental health, social care and cyber security to name but a few – more and more public buyers are looking to new solutions from new technology. Legacy systems and cumbersome procurement structures can only hold back the GovTech tide so long.

WHY GOVTECH COMPANIES WILL BE SO VALUABLE

When looking at investments like Echo, investors need to understand why these companies will almost always develop better solutions than incumbent players, and hence build attractive businesses that will fuel acquisitive exits:

Good value for money for investors (nascent sector)

Passionate founders (mission-driven)

Unencumbered technology

Singular focus

Data-first mindset

This last point is critical in understanding why new, well-architected platforms can add such enormous value when implemented across the public sector.

Take Echo. Echo is not just a company when viewed with a GovTech hat on. Echo has the ability to provide Public Health England (PHE) with data that it never had access to before (but desperately wanted). Thanks to Echo, PHE could actually search through data: which patients are taking what medications, when, and in particular where adherence is lowest. Echo could allow drug companies to action product recalls via push notifications. Echo could allow PHE to analyse cohorts of patients by postcode and draw up statistically interesting facts on populations. The examples continue. Whether McKesson knows what a beautiful business they bought is beyond my pay grade, but if they are able to let Echo flourish, we will all as citizens benefit from their great tech, excellently executed.

Here at PUBLIC, we specialise in backing companies with public sector applications, helping them scale across government by reducing the barriers to entry that currently exist. Our platform gives us the insight, power, and capability to take on incumbent providers, therefore doubling or tripling the addressable market for the companies we support. We are passionate about what we are pioneering: creating the environment for any company looking to engage and scale within government. More VCs and investors are joining us in this mission – it’s time for us to recognise the returns, as well as the potential for public sector improvement, that investing in GovTech represents.